Citigroup Inc.'s announcement that it will convert most of the brokers in its bank-based network into fee-based advisers has many of its brokers wondering how they will get paid and what they will be selling.
Deborah McWhinney, head of personal banking and wealth management at the New York-based bank, said last Monday that she hopes to convert most of the about 600 commission-based financial consultants at Citi Personal Wealth Management into teams of fee-only financial advisers by 2011. She also plans to refer some clients and prospects to external independent registered investment advisers, who will share some of their management fees from the referred assets with the bank.
Left unanswered in her announcement were questions on how the bank will split management fees with internal advisers, what will happen to trailing commissions from products such as mutual funds and annuities, and how much Citigroup will collect from outside advisers for client referrals.
“Guys that are transactional realize they are out of there,” said a former Citigroup broker, who left in August to join a California-based RIA. “The fee-based guys who think they can retain their Citi clients and reach into the bank for new ones are pretty sure their payout will be lower than what they could keep by going independent.”
The adviser, who requested an-onymity, said Citigroup faces the challenge of convincing both advisers and clients that the advisers are truly independent and exercising fiduciary responsibility.
In an interview, Ms. McWhinney — a former head of The
Charles Schwab Corp.'s RIA custody platform — said the advisory model will allow brokers to attract funds from wealthy clients at the bank who don't use its in-house investment services.
“We're probably half of where we could be” in managing such assets, she said.
Ms. McWhinney touted the referral program, which will be coordinated in part by salary-based brokers, as an open platform that investors are embracing. It will include not only internal and external advisers but also a national investor center for self-directed investors who prefer to pay for services on a transactional basis.
Outside advisers accepted into the referral program are expected to reimburse the bank about 25 basis points of the asset-based fee they charge referred clients — similar to what Schwab assesses in referral programs from its brokerage network — said an insider, who asked not to be identified.
A bank spokesman wrote in an e-mail that details of compensation and products for internal advisers are still being worked out, with plans for a full conversion to the fee-based system by 2011.
“There will be a new compensation plan, the details of which are not finalized,” Alex Samuelson wrote, adding that advisers will remain bank employees and enjoy Citigroup's full complement of benefits.
Citi currently uses a revenue-based compensation grid designed for the branch-based brokers of its former Smith Barney unit. Under such plans, the percentage of commissions kept by brokers rises as they hit preset revenue production levels.
Ms. McWhinney said she expects that Citi's fee-based model will not only attract more bank clients but also brokers from other firms who are looking for a fee-based model. One independent RIA who contacted the bank for information about participating in the referral system said he was asked if he'd be interested in joining as a full-time Citi Wealth Management adviser. But some advisers believe that Citi may have a hard time promoting the bank RIA channel as an alternative to a truly independent firm
Mr. Samuelson wrote that 2010 will be a transition year for determining how 12(b)-1 mutual fund fees and other continuing commissions will be accounted for under the new model. But at that point, Citi will retire sales of funds that pay trailing commissions, offering no-transaction-fee fund platforms for advisory clients.
“Any transactional business via the National Investor Center will feature no-load funds,” Mr. Samuelson wrote. Citigroup “will work with our third-party-vendor partners to customize certain products to eliminate the upfront commissions.”
E-mail Jed Horowitz at [email protected].
